Ethics Opinon 1993-1

SUBJECT: PROPRIETY OF ASSET PROTECTION PLANNING

I
QUESTION PRESENTED

To what extent may a member of the State Bar of California advise or assist a Client with respect to an avoidance of existing and identifiable creditors' rights and a protection of the Client's assets?

II
SUMMARY

A member who furnishes advice and institutes asset protection techniques may not do so unless the member complies with Rule 3-210 of the California State Bar Rules of Professional Conduct. The member may not participate in violations of criminal and civil law against fraudulent transfers.

III
STATEMENT OF FACTS

A potential Client seeks advice to protect personal assets from existing and identifiable creditors. The Client expresses an intent to transfer assets out of the creditors' reach. Client requests Attorney to advise, prepare, and assist in the implementation of an asset protection plan, which may include certain trust instruments, family limited partnerships, and similar techniques.

IV
APPLICABLE RULES

Business and Professions Code Section 6128
Civil Code Section 3439 et seq.
Penal Code Section 154(a)
Penal Code Section 531
Rule 3-210. Advising the Violation of Law. The State Bar of California Rules of Professional Conduct (effective May 27, 1989)

V
ANALYSIS
Rule 3-210 of the State Bar of California Rules of Professional Conduct provides the following:

A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule, or ruling of a tribunal.

The commentary to Rule 3-210 indicates that the provision applies not only relative to the prospective conduct of the Client but also to the interaction between the member and Client and to the specific legal service sought by the Client.

Civil Implications

The Uniform Fraudulent Transfer Act (Civ. Code § 3439 et seq.) ("UFTA") provides a remedy for creditors to whom its provisions apply for transfers deemed fraudulent(1) Under the Act, a "creditor" means a person who has a "claim", which means a "right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." (Civ. Code §§ 3439.01(b), (c))

Civil Code Section 3439.04(a) sets forth that a transfer made or obligation incurred by a debtor is fraudulent as to a creditor, in a civil sense, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation with the actual intent to hinder, delay, or defraud the creditor.

In the instant hypothetical, the potential Client has stated to the Attorney an intent to defraud existing and identifiable creditors. The Committee therefore assumes that this admission constitutes "actual intent to defraud". The Committee likewise assumes, without deciding, that the UFTA applies to the hypothetical transaction and would find any transfer to be fraudulent.

The Statement of Facts does not embody any supposition that any transfer would be made in contemplation of a bankruptcy filing. The Committee is aware of the difficulty in distinguishing between permissible pre-bankruptcy planning and fraudulent transfer doctrines. (For example, see disparate results in In re Tvetan, 70 B.R. 529 (Bankr. D. Minn. 1987), aff'd 848 F.2d 871 (8th Cir. 1988), and In re Johnson, 80 B.R. 953 (Bankr. D. Minn. 1988), aff'd 880 F.2d 78 (8th Cir. 1989)). Those considerations are beyond the scope of this opinion.

Given the application of the UFTA, any transfer of assets the Client makes would be a transaction which would be the subject of civil remedies. The Attorney's assistance in such transfer would aid a "fraudulent" act as that adjective is understood within the provisions of the UFTA.

The UFTA does not expressly prohibit engaging in a fraudulent transfer, although it does provide post-transfer remedies. Nonetheless, the Committee views the Attorney's knowing assistance in such transactions as contrary to civil law, which therefore will subject the Attorney to discipline under Rule 3-210. In addition, since the remedy for a fraudulent transfer is avoidance (Civ. Code § 3439.07), the Committee is of the opinion that any professional fee for any legal assistance in completing a known invalid or ineffective transaction is unconscionable. See Rule 4-200 of the State Bar of California, Rules of Professional Conduct.

Criminal Implications

To the extent that the Attorney participates in the transfer, both the Attorney and the Client may be subject to criminal sanctions. Penal Code § 154 imposes a criminal misdemeanor on a debtor's fraudulently moving property out of state or transferring with the "intent to defraud, hinder or delay" creditors.

Penal Code § 531 provides the following:

Every person who is a party to a fraudulent conveyance of any lands, tenements, or hereditaments, goods, or chattels, or any rights or interest issuing out of the same, or to any bond, suit, judgment, or execution, contract or conveyance, had, made or contrived with intent to deceive and default others, or to defeat, hinder or delay creditors or others or their just debts, damages, or demands; or who, being a party as aforesaid, at any time wittingly and willingly puts in, uses, avows, maintains, justifies, or defend the same, or any of them, as true, and done, had, or made in good faith, or upon good consideration, or aliens, assigns or sells any of the lands, tenements, hereditaments, goods, chattels, or other things before mentioned, to him or them conveyed as aforesaid, or any part thereof, is guilty of a misdemeanor.

Business and Professions Code § 6128 further indicates that an attorney is guilty of a misdemeanor when "guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party". Bus. and Prof. Code § 6128(a).

The Committee is of the opinion that the subject conduct would result in criminal penalties relative to both the Client and the Attorney.

Conclusion

We conclude, therefore, after consideration of both the civil ramifications and the criminal prohibitions, that the Attorney cannot render the services requested by Client, at the risk of discipline pursuant to Rule 3-210. This opinion is not intended to preclude any other permissible alternatives to the giving of advice or furnishing of proper services. In the absence of permissible alternatives, declination of employment would be appropriate, or withdrawal therefrom is warranted. See Rule 3-700(B)(2) of the State Bar of California, Rules of Professional Conduct.

This Committee does not wish to impose a duty on the Attorney to the creditors of Client, and this opinion should not be so construed. Nonetheless, an Attorney does maintain a duty to protect the public and to promote respect and confidence in the legal profession. Rule 1-100. A client's creditors are but one class within the public to whom an attorney's ethical responsibilities are owed. Coppock v. State Bar (1988) 44 Cal.3d 665, 687. At a minimum, and quite aside from the restrictions of Rule 3-210 and the criminal statutes herein, the Attorney's assistance with, and facilitation of the Client's expressed, wrongful intent is intolerable as a matter of public policy.

This opinion is advisory only. It is not binding on the San Diego County Bar Association, its officers, agents, the State Bar of California or any court.

The committee does not find an express prohibition against making transfers within the body of the Uniform Fraudulent Transfer Act. The thrust of the act provides a mechanism for creditors to reclaim value as against the transferees of the debtor. Thus, the committee believes that mere advice about the legal effect of the subject transfer does not, without more, subject an attorney to discipline.

Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.